How Obama's 'fiscal cliff' plan would hit the middle class

How Obama's 'fiscal cliff' plan would hit the middle class

How Obama's 'fiscal cliff' plan would hit the middle class

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by CBS News

KMOV.com

Posted on December 19, 2012 at 12:40 PM

Updated Wednesday, Dec 19 at 1:08 PM

President Obama has said it time and time again: The wealthy should contribute more in taxes while the middle class should be protected in budget and deficit negotiations. However, the president's most recent proposal for averting the so-called "fiscal cliff" includes some proposals that would hit the middle class -- more so than the wealthy -- with tax hikes.

On Monday night, CBS News chief White House correspondent Major Garrett reported the president gave House Speaker John Boehner his latest "fiscal cliff" offer, calling for $1.2 trillion in new tax revenues and $930 billion in spending cuts.

On the tax revenue side, Mr. Obama's latest offer allows the 2 percent payroll tax cut -- first enacted two years ago -- to expire. The deal also includes huge savings from adopting a "chained" consumer price index (chained CPI), changing the way the government measures inflation. Negotiations over the "fiscal cliff" -- the series of tax hikes and spending cuts set to kick in next year -- remain fluid, so both of these proposals could be scrapped or modified. Both of these policies, however, would, in effect, raise taxes on the middle class.

The payroll tax cut

The Obama administration enacted the payroll tax cut as a temporary means of boosting economic growth, so letting it expire arguably shouldn't be called a tax "hike." The fact is, however, that if it expires, taxes will be higher. CBS News' Jim Axelrod reported on the strain this will put on middle-class families at a time when the economy is still vulnerable: Households making $50,000 would pay $1,035 a year more in payroll taxes.

Ending the payroll tax holiday, bringing the payroll tax back up to 6.2 percent from 4.2 percent, would hit lower- and middle-income households more significantly -- that's because the payroll tax is only applied to income up to $110,100.

As CBS MoneyWatch editor-at-large Jill Schlesinger reported, the payroll tax holiday put more money in the pockets of 160 million Americans.

Sen. Bob Casey, D-Pa., introduced legislation this month to extend the payroll tax cut, saying, "Protecting the middle class and fueling the economy is something both Republicans and Democrats should support."

The "chained" CPI

Unlike the payroll tax, there's no excuse for the White House's proposal to collect more taxes through the "chained" CPI.

Mr. Obama embraced the chained CPI after House Speaker John Boehner first proposed it. In addition to saving around $130 billion in government spending on programs like Social Security, Major Garrett reports, the White House also expects this move to raise about $90 billion in new tax revenue -- that's because tax brackets are indexed to inflation.

"If you didn't index [tax] brackets, inflation would drive people into higher tax brackets even though, in fact, they weren't better off," Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, explained to CBSNews.com.

A "chained" consumer price index measures inflation more conservatively than the standard CPI because it takes into account the fact that people modify their behavior and purchase different items when prices change. As the Bureau of Labor Statistics explains, "If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef."

The chained CPI typically would in one year go up about 0.2 or 0.3 percentage points more slowly than the standard CPI. What that means for taxpayers, Van de Water said, is that "for a given income, people will tend to be in slightly higher tax brackets than they would otherwise. People will over time pay slightly higher and higher levels in taxes."

Here's a simple example: Say your income is $50,000, and there are just two brackets -- on your first $10,000 in income, you pay nothing; on all income above that, you pay 10 percent.

Let's say your income goes up to $55,000, but there's 5 percent inflation under the current CPI. In that case, the 10 percent tax bracket would move up from $10,000 to $10,500, and you would pay $4,450 in taxes.

Under a chained CPI, however, inflation would likely be measured at about 4.7 percent, meaning the top bracket would start at $10,470. You would pay $4,450 in taxes, or $30 more.

Even in the real world, with more complex tax brackets, the impact on taxes would be small at first, Van de Water said. "But this small effect cumulates over a period of time."

This sort of change wouldn't impact the wealthiest Americans very much, since most of their income is already in the top tax bracket. "It has the biggest relative effect on the very broad middle of the income distribution," Van de Water said, pointing to research from the Tax Policy Center.

How the "chained" CPI hits seniors

While the chained CPI would break the president's pledge to not raise taxes on the middle class, the proposal has primarily angered many liberals for another reason: It cuts benefits to Social Security, breaking another one of the adminstration's promises.

Just weeks ago, the White House insisted Social Security would not be on the negotiating table. "We should address the drivers of the deficit, and Social Security currently is not a driver of the deficit," White House spokesman Jay Carney told reporters.

This was also a major part of the presidential campaign. During a campaign stop at a restaurant in Stuart, Virginia on Aug. 14, Vice President Joe Biden told voters, "I guarantee you, flat guarantee you, there will be no changes in Social Security. I flat guarantee you."

To explain the White House's latest proposal, Carney said on Tuesday, "As part of an effort to find common ground with Republicans, the president has agreed to put this in his proposal... The president has always said as part of this process... that it would require tough choices by both sides."

Seniors who depend on Social Security are already hard-pressed to live by the cost-of-living adjustments they receive. Using a "chained" CPI, and presuming that seniors can substitute in cheaper goods when their shopping list gets too expensive, doesn't take into consideration one key point: A seniors' budget is largely spent on must-have items like medicine and doctors' bills. Health care costs typically go up noticeably faster than the average rate of inflation.

The Bureau of Labor Statistics even created an experimental CPI for Americans 62 and older. This CPI shows that the basket of goods that seniors typically buy has a rate of inflation 0.2 - 0.3 percentage points higher than the standard CPI. The "chained" CPI, as mentioned above, would set a rate of inflation 0.2 - 0.3 percentage points lower than the status quo.

This has left many liberals in Congress and advocacy groups like the AARP outraged. Rep. Charlie Rangel, D-N.Y., a senior member of the House Ways and Means Committee -- the committee responsible for taxes -- called the idea "unacceptable."

"A move towards chained consumer price index would be a long-term benefit cut for every single person who receives a Social Security check," he said.

Several lawmakers expressed their frustration on Twitter: "Chained CPI cuts get deeper as you grow older, meaning you must dig into your savings more the longer you live#socialsecurity," wrote Rep. Keith Ellison, D-Minn.

"#socialsecurity has nothing to do with the deficit -- why are we even talking about it?," wrote Rep. Hank Johnson, D-Ga. Rep. Donna Edwards, D-Md., added, "For all beneficiaries -- seniors, vets, children, the disabled -- Chained CPI is a benefits cut."

A new CBS News poll shows that 57 percent of Americans oppose reducing Social Security benefits for higher-income seniors as a means of reducing the deficit.

Grassroots groups are seizing on public sentiment to bring about action. MoveOn.org, for instance, is asking its supporters to call their senators with this script in hand: "Senate Democrats have been vocal opponents of cuts to Social Security benefits. Can I count on you to do everything in your power to stop this deal if it includes the reported cuts to Social Security benefits?"

The AARP's executive vice president Nancy LeaMond noted in a statement that a chained CPI would hit the oldest Social Security recipients the hardest. "The chained CPI is a stealth benefit reduction that will compound over time and cut thousands of dollars in retirement income for current beneficiaries," she said. "A typical 80-year-old woman will lose the equivalent of 3 months worth of food annually."

The White House has said that Mr. Obama's plan would, as spokesman Jay Carney put it, "protect vulnerable communities, including the very elderly."

Carney didn't say exactly how the White House would do that, but the Center on Budget and Policy Priorities' Van de Water has written about how a chained CPI could be adjusted to protect the elderly. For instance, long-time Social Security recipients could get higher benefits to make up for the slower rate of inflation.

"As far as Social Security is concerned, the effect of a chained CPI cumulates the longer a person is on the Social Security rolls -- after 10 years, it would represent as much as a 3 percent benefit reduction, after 20 years as much as a 6 percent reduction," he explained to CBSNews.com. Furthermore, "The older beneficiaries tend to be poorer because their non-Social Security sources of income tend to not keep pace with inflation, and they tend to use up their assets as they get older."

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